Supreme Court upholds SEC’s circular on cap of foreign holdings

Public utilities

BAGUIO CITY – The Supreme Court (SC) affirmed yesterday its 2016 ruling that denied the petition challenging the implementation by the Securities and Exchange Commission (SEC) of the 40 percent limit on foreign ownership in public utility corporations.

In implementing the constitutional requirement of 60-40 participation of Filipinos and foreigners, respectively, in public utility corporations, the SEC issued Memorandum Circular No. 8, series of 2013. Memorandum Circular No. 8 states: “All covered corporation shall, at all times, observe the constitutional or statutory ownership requirement. For purposes of determining compliance therewith, the required percentage of Filipino ownership shall be applied to both the total number of outstanding shares of stock entitled to vote in the election of directors; and the total number of outstanding shares of stock, whether or not entitled to vote in the election of directors.”

It was issued by the SEC in line with the SC’s 2011 decision on the case of the Philippine Long Distance Telephone Company (PLDT).

The 2011 decision ruled that the term “capital” in a public utility corporation refers only to “common shares” and not to the total outstanding capital stocks composed of “common” or voting shares and “preferred” or non-voting shares.

With decision, participation of Filipinos and foreigners in public utility firms should be reckoned only the basis of their “common” shares holdings.

But the SC said corporations that violate the constitutional requirement of 60 percent Filipino ownership and control are given time to cure their deficiencies prior to the start of an administrative case or investigation to be conducted by the SEC.

In a press briefing, SC spokesman Theodore O. Te said the High court maintained its 2016 ruling against the petition of Jose Roy III.

Te said: “Voting 8-5, the Court denied petitioners’ motion for reconsideration of the Court’s 22 November 2016 Decision (which denied the petition and the petition in intervention) for not having raised any substantially new grounds to warrant a reconsideration.”

In a decision written last November by Justice Alfredo Benjamin Caguioa, the SC upheld the validity of SEC Memorandum Circular No. 8, Series of 2013 or Guidelines on Compliance with the Filipino-Foreign Ownership Requirements Prescribed in the Constitution and/or Existing Laws by Corporations Engaged in Nationalized and Partly Nationalized Activities.

In 2013, Roy challenged the constitutionality of the memorandum claiming it did not conform with the SC decision in the PLDT case in 2011 on the limit of foreign ownership in public utility corporations under Section 11, Article XII of the Constitution.

Section 11, Article XII of the 1987 Constitution provides that “no franchise, certificate, or any other form of authorization for the operation of a public utility shall be granted except to citizens of the Philippines or to corporations or associations organized under the laws of the Philippines, at least sixty percentum of whose capital is owned by such citizens .... ”

Roy claimed that the SEC abused its discretion in issuing MC No. 8 wherein it omitted the uniform and separate application of the 60:40 rule in favor of Filipinos to each and every class of shares of a corporation.

He asked the SC to declare unconstitutional SEC’s MC No. 8 and to order the SEC to investigate PLDT’s compliance with Section II, Article XII of the Constitution.

Roy said the SEC had declared PLDT compliant with the requirement of the Constitution and the decision of the as it issued MC8.

He pointed out that based on the SC decision, the 60-40 Filipino-foreign ownership in public utility corporations like the PLDT should apply separately to each class of shares.

He stressed that SEC’s MC No. 8 did not make a distinction between the different classes of shares, and “instead, offers only a general distinction between voting and all other shares.”

In its 2011 ruling, the SC said that “there is no dispute that it is only after the SEC has determined PLDT’s violation, if any exists at the time of the commencement of the administrative case or investigation, that the SEC may impose the statutory sanctions against PLDT.”

“In other words … the SEC shall impose the appropriate sanctions only if it finds after due hearing that, at the start of the administrative case or investigation, there is an existing violation of Section 11, Article XII of the Constitution,” it said.

“Under prevailing jurisprudence, public utilities that fail to comply with the nationality requirement under Section 11, Article XII and the FIA (Foreign Investments Act) can cure their deficiencies prior to the start of the administrative case or investigation,” it said.

In resolving Roy’s petition and Wilson Gamboa Jr.’s intervention, the SC deliberated on two issues – “1. whether the SEC gravely abused its discretion in issuing MC No. 8 in light of the Gamboa Decision (2011) and the Gamboa Resolution (2012), and 2. whether the SEC gravely abused its discretion in ruling that PLDT is compliant with the constitutional limitation on foreign ownership.”

In its resolution, the SC said: “The Court disposed of the second issue summarily for lack of merit. The Court found that the SEC had yet to make a definitive ruling on PLDT’s compliance with the capital requirement pursuant to the Gamboa Decision and the Gamboa Resolution, thus any ruling would be premature.”

It added that “the determination of PLDT’s compliance with the capital requirement is a question of fact best left to the SEC as the Court is not a trier of facts.”

Thus, the SC said, “the SEC did not gravely abuse its discretion as it was simply implementing the Gamboa Decision and the Gamboa Resolution.”